CHIPS: China Chipmaker Lands in Eye of Trump Trade War

Bottom line: Washington's punishment of a
Chinese chipmaker accused of stealing from Micron Technology is
part of a savvy targeted approach by the Trump administration aimed
at spotlighting illegal business practices by Chinese tech
firms.

I thought I'd begin this Monday
with a wrap and look at what's ahead for a Chinese chipmaker
called Jinhua, which fell squarely in the crosshairs of
Donald Trump's trade war with Beijing in a series of breakneck
developments last week. This particular case seems to be part of a
growing pattern that is seeing Trump pick his battles one at a
time, at least when it comes to handling Chinese technology
companies.

We'll review the details on this latest case involving Jinhua
and its dispute with US chip giant Micron
Technology (Nasdaq: MU) shortly. But the bigger picture is
that Trump has accused Chinese companies of stealing US
intellectual property and has made that issue central in his
current push for a trade deal. Previously US companies with such
complaints could only seek assistance from the courts, mostly in
the US and EU, since few believe the Chinese court system could
handle such cases effectively and objectively. But the government
can obviously take action much more quickly and effectively, as
Trump is showing with his latest actions.

All that said, let's review the facts of this complex case
before trying to understand what it means and where things might be
going. It all began last December when Micron, the largest US maker
of memory chips, sued Jinhua in the US on accusations of
intellectual property theft. Jinhua responded by countersuing
Micron in its home province of Fujian in China. Perhaps not
surprisingly, Jinhua got a sympathetic ruling from a hometown judge
that locked some of Micron's memory chips out of China.

All of that is relatively ancient history, and things had
settled into the usual legal stalemate until last week, when the
Trump administration suddenly decided to get involved. In a series
of coordinated moves, the administration first announced that
Jinhua was being banned from buying from its US suppliers. That
move was reminiscent of another action taken against telecom
equipment maker ZTE
(HKEx: 763; Shenzhen: 000063) earlier this year, even though
reasons for the two actions were quite different.

Just days after taking the new action against Jinhua, the US
Department of Justice unsealed an indictment with charges similar
to those raised by Micron. (English
article) The indictment goes into quite a level of detail,
presumably much of it taken from the original Micron lawsuit.

But it essentially says that several former Micron employees
took intellectual property from the company before leaving, and
then transferred that to Jinhua. An interesting twist is that
Taiwan's UMC (Taipei: 2303) was apparently part of
the scheme as a middleman, and has since cut all its R&D ties
with Jinhua. Jinhua itself remained mum through most of this, but
finally issued a statement over the weekend saying it respects
intellectual property and blasting Micron for trying to hinder its
development. (Chinese
article)

Siding with the Home Team

Obviously I can't say for sure whether Micron's claims are
valid, though this certainly wouldn't be the first time this kind
of blatant intellectual property theft has occurred. The important
thing is that Trump has clearly sided with Micron, and is choosing
to make this an example of how executive actions can be taken far
more quickly than court actions to address this kind of
situation.

Beijing itself spoke out initially but since then has been
relatively quiet on the matter, perhaps because all of this comes
at a delicate time when it wants to try to reach a new trade deal
that would address all of Trump's complaints. Beijing was far more
outspoken during the ZTE case earlier this year, which saw the
company nearly put out of business after Washington took similar
action to punish it for selling US products to Iran in violation of
US sanctions. (previous
post)

Trump has also been quite aggressive with this kind of targeted
move against Chinese tech companies by vetoing proposed purchases
of US tech firms by Chinese buyers. Somewhat ironically, one of
those interventions under the previous Obama administration came
after a Chinese buyer tried to buy Micron itself. (previous
post). If that move had succeeded, perhaps it would have
negated the need for a company like Jinhua to steal the property
instead through more underhanded means.

At the end of the day, I really do have to commend Trump for
this kind of precision approach, which draws attention to
individual cases that exemplify China's bad trade practices without
putting entire industries at risk. In this case I doubt the US will
have much incentive to reach a deal to end its ban against Jinhua,
since it has very little incentive to do so. Accordingly, this
company whose high-tech hopes were built upon stolen property will
have to either shift its focus or look elsewhere for new
non-American suppliers.